The Reserve Bank of India (RBI) cut interest rates by more than expected 50 basis points on Friday, a third consecutive reduction, and unexpectedly reduced the cash reserve ratio for banks to provide a major liquidity fillip to support the economy amid geopolitial and tariff headwinds.
RBI Governor Sanjay Malhotra. Photograph: ANI Photo
The RBI’s six-member monetary policy committee, headed by Governor Sanjay Malhotra and consisting of three external members, voted five to one to lower the benchmark repurchase or repo rate by 50 basis points to 5.5 per cent.
It also cut the cash reserve ratio by 100 basis points to 3 per cent, adding Rs 2.5 lakh crore to already surplus liquidity in the banking system.
With the latest reduction, RBI has now cut interest rates by a total of 100 basis points in 2025, starting with a quarter-point reduction in February – the first cut since May 2020 – and another similar-sized cut in April.
The central bank, at the same time, changed its monetary policy stance to “neutral” from accommodative, with Malhotra saying further action will depend on incoming data.
Giving rationale for the decision, the RBI Governor said inflation or price rise has softened significantly over the last six months from above the tolerance band in October 2024 to well below the target, with signs of a broad-based moderation.
Growth, on the other hand, remains lower than aspiration amid a challenging global environment and heightened uncertainty.
“Thus, it is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum,” he said.
“This changed growth-inflation dynamics calls for not only continuing with the policy easing but also frontloading the rate cuts to support growth.”
The rate cut comes as the Indian economy slowed to a four-year low of 6.5 per cent in the fiscal year that ended March.
RBI projected the economy to grow by the same measure in the current financial year that started on April 1 as rising trade tensions following US President Donald Trump’s tariff policies provide headwind.
The central bank lowered its inflation projection to 3.7 per cent for 2025-26 from 4 per cent earlier.
“While price stability is a necessary condition, it is of course not sufficient to ensure growth,” he said.
Malhotra said the RBI remains committed to provide sufficient liquidity to the banking system.
The 100 basis point cut in cash reserve ratio (CRR) will be carried out in four equal tranches of 25 bps each with effect from the fortnights beginning September 6, October 4, November 1 and November 29, 2025.
“The cut in CRR would release primary liquidity of about Rs 2.5 lakh crore to the banking system by December 2025.
“Besides providing durable liquidity, it will reduce the cost of funding of the banks, thereby helping in monetary policy transmission to the credit market,” he said.
Strong macroeconomic fundamentals and a benign inflation outlook provide space for monetary policy to support growth, while remaining consistent with the goal of price stability, he said.
“As global environment remains uncertain, it has become even more important to focus on domestic growth amidst sustained price stability.
“Accordingly, today’s monetary policy actions should be seen as a step towards propelling growth to a higher aspirational trajectory.”
He hastened to add that there was “no tussle” between price stability and growth in the medium and long term.
“Price stability preserves purchasing power, imparts certainty to households and businesses in their savings and investment decisions and ensures congenial interest rates and financial conditions, all of which foster consumption, investment and overall activity.
“Moreover, it is crucial for equitable growth and shared prosperity because its absence is disproportionately burdensome on the poor.”
While price stability is a necessary condition, it is not sufficient to ensure growth, he said.
“A supportive policy environment is vital. This is even more important during periods of high uncertainties such as the current times.”
At the RBI, while price stability remains the focus of monetary policy, it is not oblivious to putting in place complementary monetary and credit policies and regulations that support growth and prosperity, he added.
